The mortgage market slows down
28/03/2008
When house prices were going nowhere but up, mortgages of 100% were quite common. Since the property was almost guaranteed to increase in value, banks and building societies felt confident about getting their money back.
Even people with no savings found they could get what they needed – and a bit more. 125% mortgages were very popular with those who wanted to improve a house as well as buy it.
Today, it’s a very different picture. The last lenders offering 125% mortgages have now pulled them from the market. Recent data from the Council of Mortgage Lenders (CML) shows that the typical first-time buyer in January borrowed 88% of their property’s value, down from 90% the month before.
Worried about lending
So why are the banks and other lenders cutting back on their offers? Remember that consumers aren’t the only ones worried about their finances these days.
When the economy is booming, financial companies are happy to lend money to businesses and individuals alike. They might not recover everything they lend out, but on the whole the interest they charge makes it all worthwhile.
But when things are looking grim, they worry that more and more borrowers may not be able to pay them back. They also worry about what might happen if their own creditors (including all the people who trust them with their savings) start asking for their money back. Plus, the libor rate (the rate at which banks lend to each other) is unusually high, at around 6%, so banks are reluctant to lend if it means they might have to borrow from each other.
Altogether, banks have good reasons to hang on to their money – and today, mortgage approvals are at their lowest level in about 10 years, dropping to 50,300 in January, 19% down from the previous month.
But the banks are still busy. January also saw 85,000 remortgages (43% up from December). After all, at the end of a decade-long house-price boom, millions of homeowners are already ‘sitting on’ many thousands of pounds of profit, and a remortgage can give them access to that cash.
Some of them remortgage to finance a project (home improvements, for example) while others do it to consolidate their debts – for someone with enough equity, a remortgage might be a lot more attractive than a debt solution like debt management or an IVA (Individual Voluntary Arrangement).
Worried about borrowing
For the moment, it’s mainly the supply side of the mortgage market that’s being affected: banks are simply less willing to grant mortgages. However, restricted access to credit can end up reducing demand for mortgages too.
House prices can suffer when too many first-time buyers can’t enter the housing market. With fewer potential buyers for each property, many sellers might feel pressured into dropping their price. The longer this goes on, the greater the risk we’ll enter a spiral of falling prices, with would-be buyers more and more convinced they’ll save money by waiting and lose money by buying.
If that happens, we might find that the banks are willing to lend – but no-one’s keen to borrow.
Carlton House, Vere Street, Salford M50 2GQ. Company registration No. 4348410. Registered in England and Wales